The Impact of Environmental Contamination on Condo Prices: A Hybrid Repeat‐Sale/Hedonic Approach

Abstract

We extend the literature on the impact of externalities using an approach based on a hybrid of hedonic and repeat-sales methods. The externality in question is groundwater contamination in Scottsdale, Arizona. The use of condominium sales allows us to assume that major physical characteristics remain unchanged, but location parameters may be altered by urban growth and development as well as contamination. We find an economically significant discount for properties located in the contaminated area. Interestingly, it does not appear until several years after the contamination becomes publicly known, and it seems to have disappeared before the end of the study period.The last three decades have seen the emergence of a voluminous literature examining the interaction between environmental factors and real estate markets, much of it concerning the extent to which negative environmental spillovers are capitalized into real estate values. These interests have given rise to two broad categories of real estate literature reviewed in Jackson (2001). The first of these is dominated by the appraisal profession and has focused on valuation concepts and methods (see, e.

Hedonic Valuation with Translating Amenities: Mountain Pine Beetles and Host Trees in the Colorado Front Range

“…If a property sells τ times during our research period, it will contribute τ − 1 observations to the repeat sales data. As discussed in Palmquist (1982) and Case et al (2006), if τ > 2 this introduces a non-zero, but known error correlation for such properties. This can be accommodated in straightforward fashion via Generalized Least Squares (GLS) procedures.…”

“…As discussed in Goetzmann and Spiegel (1995) and Case et al (2006) the time-invariant area indicators ξ s capture any nontemporal components of house price appreciation, e.g. via last-minute refurbishing or minor physical improvements prior to a sale.…”

“…This term is negligibly small for both the Boulder and Larimer application. In implementing (14) we follow Case et al (2006) and set the area-specific, non-temporal component of house price appreciation ξ s to zero, as it is not related to any temporal price trajectory. We do the same for the wildfire indicators w it − w i1 as we want our baseline price index to be untainted by fire effects.…”

“…In addition, we control for changes in home structures by eliminating properties with documented home improvements from our sample, as discussed in the empirical section. 7 For further details and motivation for this tri-valued indicator approach see, for example,Palmquist (1982) andCase et al (2006).…”

Modelling the impact of earthquake activity on real estate values: a multi-level approach

“…Helpfully, elsewhere in the literature, analysts have sought to find ways to capture the changing spatial impacts of environmental events over time. For instance, Case et al (2006) develop a hybrid hedonic/repeat sales model to explore the changes in the impact of environmental contamination annually over an 18-year period. The model contains a distance decay function that changes for each year of the study period.…”